Stone by Stone

ICBA’s Plan for Prosperity gains momentum in Congress to alleviate the regulatory avalanche crushing community banks

By Kelly Pike

It seems that everyone in Congress agrees that community banks need regulatory relief—and despite the challenges of passing legislation, there is reason to believe that meaningful regulatory-relief legislation may make significant progress this fall with ICBA’s Plan for Prosperity helping to set the agenda.

Since the Wall Street financial crisis, Congress has been extremely busy focusing its time and attention on addressing urgent problems created by the biggest too-big-to-fail banks, while trying not to harm community banks in the process, says ICBA President and CEO Camden Fine. “Members of Congress have continued to widely recognize and support the need to provide community banks regulatory burden relief,” Fine says. “Bipartisan awareness on Capitol Hill, from the party leadership on down, has been growing in recognizing that now is the time to enact a substantial regulatory relief legislative package for community banks. The discussion among lawmakers has turned to what regulatory relief would be most appropriate and effective to provide community banks, advancing well beyond whether to provide community banks any regulatory relief.”

ICBA’s Plan for Prosperity legislative platform has helped communicate and organize a wide range of regulatory-relief options for Congress that would have the most constructive effect on community banks, Fine adds. “Most of these bills could easily pass Congress on voice votes with broad bipartisan support.”

Prospects for regulatory reform solidified into action in April when House Financial Services Committee Chairman Jeb Hensarling (R-Texas) announced at the ICBA Washington Policy Summit that he was working with Ranking Member Maxine Waters (D-Calif.) on a regulatory-relief package for community banks, says Brian Cooney, ICBA senior vice president, congressional relations and legislative counsel. The committee already held a hearing on the topic in March, during which ICBA Chairman Bill Loving testified.

But the committee’s attention shifted to housing finance and government-sponsored enterprise reform this summer when Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) introduced the Housing Finance Reform and Taxpayer Protection Act (S. 1217), making a corresponding bill in the House a new top priority. Hensarling then released his own housing finance reform bill in July, the Protecting American Taxpayers and Homeowners (PATH) Act (H.R. 2767). The PATH Act contains some regulatory relief for community banks, including several Plan for Prosperity provisions, but the bill, which would eliminate the government’s role in mortgages, was drafted without Democratic input and won’t likely pass the Senate.

“GSE reform has sucked all oxygen out of room for regulatory-relief legislation in the House for the summer,” Cooney says. “Hopefully, as Congress returns to Washington in September after its summer recess, it will pivot back towards meaningful regulatory-relief activity for community banks. We will need grassroots help from our bankers to make that happen.”

ICBA, working with its State and Regional Partner associations, has made significant progress. To date, at least 15 bills incorporating Plan for Prosperity provisions, many bipartisan, have been introduced in the House and Senate—which was exactly ICBA’s goal at this point in time.

Charting the plan

Unveiled in February, the Plan for Prosperity is a flexible, streamlined collection of a dozen legislative priorities designed to eliminate excessive, redundant and costly regulations, and engineered to draw collectively the most bipartisan support in Congress. To create more opportunities for passage, the plan’s provisions are structured so that they can be introduced individually, as a group or in any configuration that most appeals to members of Congress.

The plan’s most noted reforms would improve the Consumer Financial Protection Bureau’s governance; reduce over-restrictive mortgage lending rules; increase examiner accountability to curtail harsh bank exams; curb auditing expenses and redundant privacy notices; and expand capital-raising opportunities for community banks, thrifts and mutual institutions. It quickly received endorsements from 38 state and regional associations representing the community banking industry.

The Plan for Prosperity’s strategy mimics successes stemming from the earlier ICBA-promoted legislation, such as the series of Communities First Act packages, the comprehensive bills introduced in past congressional sessions that carried as many as 36 provisions for regulatory and tax relief aimed at community banks.

And several of those individual regulatory-relief measures in the past made it into other legislation. For instance, in 2012 the Jumpstart Our Business Startups (JOBS) Act included an ICBA-promoted provision to raise the Securities and Exchange Commission registration threshold from 500 shareholders to 2,000, and increase the deregistration threshold, a major cost-savings opportunity of which many community banks have since taken advantage. Similarly, the Dodd-Frank Wall Street Reform and Consumer Protection Act included an ICBA-advocated provision that exempts small, publicly held companies from Sarbanes-Oxley Section 404(b). And three Communities First Act provisions made it into the Financial Services Regulatory Relief Act of 2006.

Now, the current dozen provisions in the Plan for Prosperity are likely to advance by riding alongside other major bills that gain momentum through the Senate and House chambers. A person would need a slide rule to calculate all the possible ways the plan’s measures could be enacted.

Making headway

Today, Plan for Prosperity provisions can be seen in many bills, most notably the Community Lending Enhancement and Regulatory Relief Act of 2013 (CLEAR Relief Act of 2013, H.R. 1750), sponsored by former community banker Rep. Blaine Luetkemeyer (R-Mo.). One of the meatiest relief bills under consideration, it includes eight provisions from the plan, touching on redundant privacy notices, an increase in the Sarbanes-Oxley Act 404(b) exemption and capital for small bank holding companies.

In July, a companion Senate bill (S. 1349, also known as the CLEAR Act) was introduced. The Senate bill, sponsored by Senate Banking Committee members Jerry Moran (R-Kan.), Jon Tester (D-Mont.) and Mark Kirk (R-Ill.), would, like the House version, exempt community bank portfolio loans from a variety of new mortgage rules to support the housing recovery, support additional capital opportunities for small bank holding companies and provide exemptions for community banks from Sarbanes-Oxley internal-controls assessment mandates.

The CLEAR Relief Act focuses primarily on lifting onerous mortgage restrictions, including the Consumer Financial Protection Bureau’s qualified mortgage rules, which are scheduled to take effect in January and will disproportionately impact community banks, says Ron Haynie, ICBA senior vice president, mortgage finance policy and executive vice president, mortgage services.

Under the ability-to-pay rules, loans considered qualified mortgages should have safe harbor from some borrower suitability lawsuits. However, the rules are too narrowly defined—they exclude balloon loans and interest-only loans from qualified mortgage safe harbor status—severely limiting the options community banks will feel comfortable offering customers, especially those buying unique properties or with unusual financial circumstances. These loans have traditionally been a competitive advantage for community banks, which carefully screen borrowers and then retain risk by keeping the loans in their own portfolios.

Starting in January, if a bank decides to make a loan that is not considered a qualified mortgage, it must be willing to accept the potential for expensive litigation. 
“Having the CFPB develop new rules that in some cases curtails the kinds of lending community banks have done for years—safely, soundly and prudently—isn’t right,” says Haynie. “If a community bank makes a loan—whether balloon loan, ARM loan or fixed-rate loan—it should get a qualified mortgage treatment if the bank places it in its portfolio.”

The CLEAR Relief Act, in the House and Senate versions, would remedy the problem by providing qualified mortgage safe harbor status for loans originated and held in portfolio for at least three years by banks with less than $10 billion in assets, including balloon mortgages. Both bills would also exempt banks with assets below $10 billion from escrow requirements. The House version would also provide relief from independent appraisal rules for some loans and increase the “small servicer” exemption threshold to 20,000 loans (up from 5,000).

There has been other progress in the House and Senate.

In the House, Luetkemeyer’s Eliminate Privacy Notice Confusion Act (H.R. 749) passed the House chamber by voice vote in March. H.R. 749 is also a provision of Luektkemeyer’s broader bill, the CLEAR Relief Act (H.R. 1750). In the Senate, Sens. Moran and Sherrod Brown (D-Ohio) introduced a bill similar to H.R. 749, the Privacy Notice Modernization Act (S. 635). It’s also included in a larger Senate bill, S. 798.

To allow thrift holding companies to use the new Securities and Exchange Commission shareholder deregistration threshold, Reps. Steve Womack (R-Ark.) and Jim Himes (D-Conn.) introduced the Holding Company Registration Threshold Equalization Act (H.R. 801). Sens. Pat Toomey (R-Pa.) and Mark Pryor (D-Ark.) introduced a companion bill in the Senate (S. 872).

Bipartisan bank examination reform bills are also active in the House and Senate. They include the Financial Institutions Examination Fairness and Reform Act (H.R. 1553)—introduced by Rep. Shelley Moore Capito (R-W.Va.) and Carolyn Maloney (D-N.Y.)—which would approve an appeals process for unfair bank exams. H.R. 1553 was also included in a mortgage secondary market reform bill, the Protecting American Taxpayers and Homeowners Act (H.R. 2767), sponsored by Rep. Jeb Hensarling (R-Texas) and Rep. Scott Garrett (R-N.J.), and approved by the Financial Services Committee in July. A Senate companion bill—and the Financial Institutions Examination Fairness and Reform Act (S. 727)—was introduced by Moran and Sen. Joe Manchin (D-W.Va.).

Other active bills include the Municipal Advisor Oversight Improvement Act (H.R. 797)—introduced by Reps. Steve Stivers (R-Ohio) and Gwen Moore (D-Wis.)—which would exempt enumerated traditional banking activities from triggering a new registration requirement with the SEC and the Municipal Securities Rulemaking Board. A Senate version of this bill, S. 710—introduced by Sens. Pat Toomey (R-Pa.), Mark Warner (D-Va.), Moran, Tom Carper (D-Del.) and Mike Johanns (R-Neb.)—would exempt banks and bank employees from registration.

On the Senate side, the most substantial regulatory relief is included in the Terminating Bailouts for Taxpayer Fairness (TBTF) Act (S. 798), sponsored by Brown and Sen. David Vitter (R-La.). The bill contains seven Plan for Prosperity provisions that address qualified mortgage rules, privacy notices, examination appeals, relief for thrifts and mutual institutions and data collection requirements. Many of TBTF Act’s provisions match up with House bills and the Plan for Prosperity.

Any Senate regulatory-relief bill with a chance of becoming law will likely follow regular order by advancing through committee hearings to a markup in committee to the Senate floor, Cooney notes. But for now, the chances of meaningful regulatory relief may depend on Federal Housing Administration reform. Senate Banking Committee Chairman Tim Johnson has said he won’t move on housing finance reform until FHA reform is addressed, which means the two areas may take up much of the committee’s focus through early fall. And since the Senate oftentimes follows the lead of the House regarding financial services legislation, the Senate may not be ready to turn its attention to regulatory relief for community banks until after the House moves similar legislation.

Stirring support

The good news for community banks is that they needn’t just sit back and watch what happens, Cooney says. Community banker grassroots advocacy is the only way to ensure that regulatory relief will build enough momentum to pass both houses, he points out, giving community bankers a huge role to play.

ICBA and the 38 state associations supporting the plan have already made invaluable inroads by advocating for the plan, notes Cooney, but to achieve critical mass, individual community bankers must continue to communicate to members of Congress—through office visits, phone calls and emails, and by continuing to seek their support of bills with Plan for Prosperity provisions.

“If we don’t exercise our grassroots muscle in a meaningful way, it will just lay there and get soft,” says Cooney, who remains optimistic that momentum behind regulatory-relief legislation will pick up this fall. “Like any muscle, grassroots advocacy is only effective if it’s used.”

Kelly Pike is a freelance writer in Annandale, Va.